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Crypto winter - blockchain technologies

Finance

Four reasons not to be deterred by the crypto winter

Published 25 July 2022 in Finance • 6 min read

The sharp fall in the value of cryptocurrencies this year is misleading. The underlying blockchain technologies remain truly transformational across a host of business applications – and are at a tipping point for adoption.

It’s winter in the crypto sector. Cryptocurrency prices are sharply down from previous awe-inspiring peaks. But champions of blockchain – the technology underlying cryptocurrencies – remain largely optimistic. Why? Because cryptocurrencies are just one possible application of blockchain technology, which, they argue, has a vast range of use cases and immense disruptive potential.

Regardless of the current price of Bitcoin, digital decision-makers can benefit from understanding how blockchain works and why it matters. Retail investors are enduring a deeply painful year, but there are four major reasons why blockchain technology is likely to continue to flourish and remain a source of value for digital leaders.

1. Blockchain technology is driving major innovation

As with the emergence and widespread adoption of the internet during the post-millennium dotcom boom, blockchain technology is giving rise to a new era of innovation. Cryptocurrency may be the best-known (and most hyped) blockchain-based innovation, but the technology can help companies create and deliver value through various other channels. As an indication of the possibilities, while retail investors also suffered during the dotcom crash, the underlying technologies being adopted during that era have gone from strength to strength.

Blockchain technology is driving major innovation in the finance sector, for example, with decentralized finance (DeFi) applications and projects proliferating. A cryptocurrency is simply a decentralized payment system powered by blockchain technology, which also supports applications including digital wallets, decentralized borrowing and lending, decentralized exchanges, alongside more traditional finance operations.

Blockchain is also driving innovation in many other sectors, ranging from healthcare to shipping and insurance to music. Blockchain technology supports large networks that are both decentralized and secure, with the ability to exchange currency or data efficiently. The versatility of blockchain technology means that every business leader can find a use case that allows them to envisage how blockchain could be used to innovate meaningfully in their organization.

Governments, too, are using blockchain technology to innovate. Since 2018, the United Nations has described blockchain technology as integral to “a unique moment in history:”

“Our society … is in transition from an industrial economy to one defined by a new set of technologies, ranging from digitalization to nanotechnology. Among the latest waves of digitalization is blockchain – a technology that many say promises to redefine trust, transparency and inclusion across the world.”

Innovation and experimentation with blockchain are being pursued by governments across the world, including in Switzerland, India, the US, Sweden, Estonia, Georgia, and El Salvador, to name just a few.

2. Blockchain will disrupt legacy institutions

Many legacy enterprises play the role of intermediary, because, without blockchain technology, a trusted third party is required to complete most transactions. Blockchain has serious potential to disrupt legacy institutions by eliminating the need for intermediaries, enabling individuals to interact directly and securely.

There is a growing list of sectors that are likely to be disrupted as a result of this, including:

  • Banking: Blockchain technology can eliminate the need for banks to hold deposits, process payments, lend and collect money, and perform many other traditional banking functions.
  • Data storage: Blockchain can disrupt the data-storage industry by enabling decentralized storage on individuals’ computers. Rather than paying for the services of a company like Dropbox, services such as Filecoin enable users (for a much lower fee) to ‘rent’ unused storage space on others’ devices.
  • Music: Just as Spotify disrupted the traditional music industry, new players such as Audius are likely, in turn, to disrupt Spotify by removing the need for an intermediary supplier between artists and their fans.
  • Social media: By supporting decentralized social-media platforms, blockchain can enable individual users to interact directly. Platforms such as LinkedIn or Facebook, which raise many privacy concerns, can be replaced by direct peer-to-peer digital interaction.
  • Hospitality: Online intermediary platforms such as Airbnb face a similar threat from blockchain, which could support a decentralized platform, on which individual users could offer or search for Airbnb-style accommodation, intermediary-free.

Government services can also be disrupted by blockchain. The technology has the potential to overhaul electoral systems, legal enforcement mechanisms, property registries, public contracting, and public recordkeeping, among many other functions. As various governments and government agencies begin transitioning to blockchain, limited interoperability between legacy and blockchain systems will be an issue. Technologies such as Chainlink, which efficiently connects on-chain and off-chain data, will become increasingly important.

3. Blockchain continues to mature

As with the early internet, blockchain technology remains clunky and a work in progress. However, widespread adoption is driving a steep maturity curve, including through the proliferation of new operating protocols and applications, making the technology safer and more intuitive to use.

Another crucial aspect of maturation of the blockchain sector is regulation. While regulatory tightening and refinement is a natural process within sectoral maturation, it is to be welcomed as a further safeguard for investors. Switzerland stands out as a country that is using regulation to drive innovation and growth in the blockchain sector. In August 2021 Switzerland enacted legal regulations for blockchain technology, creating not only legal certainty but also attracting many blockchain companies to operate within its borders. More than 1,000 enterprises, many of them in financial services, are already taking advantage of Switzerland’s innovation-friendly legal framework for the blockchain sector.

4. The metaverse will be powered by blockchain

The alternate realities of the metaverse are now taking shape, and many of these will grow out of blockchain technology. The metaverse is creating wholly new communities and virtual economies, with tantalizing opportunities for digital leaders. For those brands that feel comfortable with blockchain technology, establishing a metaverse presence can be a low-risk way to open new sales and engagement channels.

Concept of converting a work of art into a unique token. ART to NFT, non-fungible token. Painting is converted into a digital file. Innovation technology. Vector
The token economy is generating new business models

An analyst report from Citi released in March 2022 predicts that the value of the metaverse economy could rise to US$8‒13trn ‒ with up to 5bn users ‒ by 2030. Blockchain proponents view the rapid growth of the metaverse as yet another reason to stay bullish on blockchain technology; the scale, transparency, and security afforded by blockchain is what enables metaverses like Decentraland to operate.

Metaverses such as Roblox also incorporate blockchain technology. PlayDapp World, launched in February 2022, is the first blockchain-based game in the Roblox ecosystem. The game uses blockchain technology to enable players to mint new characters, pets, and other in-game items as non-fungible tokens (NFTs).

The future will run on blockchain technology

A crash in crypto prices is disconcerting for those considering investing in them, especially with lingering uncertainty about exactly how cryptocurrency works. Focusing away from digital currencies specifically, research analysts in 2021 pegged the global market size of blockchain technology at US$5.92bn. Astonishingly, the expected compound annual growth rate (CAGR) for the blockchain sector is around 86% through 2030.

Digital leaders would do well to acquaint themselves more closely with blockchain technology. Read, conduct research, ask questions – whatever it takes to get useful, actionable information about blockchain. With that understanding, decision-makers can make informed choices about blockchain technology for long-term competitive advantage. Blockchain is the platform upon which the future of business will be built and those governments and organizations that act early are likely to reap the greatest benefit.

Authors

Arturo Bris - IMD Professor

Arturo Bris

Professor of Finance at IMD

Arturo Bris is Professor of Finance at IMD. Since January 2014, he has led the world-renowned IMD World Competitiveness Center. He is also Program Director of IMD’s Navigating Fintech Innovation and Disruption program.

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